Breakpoint 2024: Fireside: Where's the Alpha: Liquid or Venture?

At Solana's Breakpoint 2024 conference, industry leaders Joe McCann and Arthur Cheong engaged in a riveting fireside chat, dissecting the age-old question: where's the alpha - liquid or venture investments? Their insights shed light on evolving investment strategies in the rapidly changing crypto landscape, with a particular focus on the Solana ecosystem and the rising influence of meme coins.

Summary

The discussion primarily revolved around the comparative advantages of liquid and venture investments in the cryptocurrency space. Both speakers, representing different investment approaches, shared their experiences and rationales for their chosen strategies.

Arthur Cheong, founder of DeFiance Capital, explained their shift from a combined liquid and venture strategy to a liquid-only focus. This decision was largely influenced by the underperformance of their Solana venture bets over the past three years, with many projects failing to outperform Solana itself.

Joe McCann, founder of Asymmetric, offered a contrasting perspective. His firm operates both liquid and venture funds, leveraging the unique characteristics of crypto markets where projects become liquid faster than in traditional venture capital. McCann emphasized the importance of risk management and the use of options and derivatives in their liquid investment strategy.

The conversation also touched upon the role of meme coins in investment portfolios, with both speakers acknowledging their potential for asymmetric returns. The discussion concluded with insights on the potential impact of the upcoming US election on the crypto market.

Key Points:

Liquid vs Venture Investments in Crypto

Arthur Cheong shared that DeFiance Capital has shifted focus to liquid-only investments after realizing that their Solana venture bets significantly underperformed over the past three years. Half of their venture investments didn't survive, and even those that did struggled to outperform Solana itself. This experience led them to appreciate the power of risk management possible with liquid investments.

Joe McCann, on the other hand, explained that Asymmetric operates both liquid and venture funds. He highlighted the key difference in fund duration - venture funds typically have a 10-year lock-up, while hedge funds often have a one-year lock-up. This liquidity profile difference allows hedge funds more opportunities to outperform venture funds. However, McCann also noted that crypto venture is unique because projects become liquid faster than in traditional VC, often within 1-3 years via token generation events.

The Importance of Fund Size in Strategy Selection

Arthur Cheong emphasized that the size of capital allocation plays a crucial role in determining the optimal investment strategy. He suggested that for allocations less than $100 million, liquid investments almost always provide better risk-adjusted returns. However, for larger allocations exceeding $100 million, venture investments start to make sense for capturing long-term growth.

Joe McCann expanded on this, explaining how Asymmetric's use of options and derivatives allows them to manage much larger fund sizes effectively. He stated that their strategy could easily handle a billion-dollar fund size in liquid investments, which would be nearly impossible for a long-only spot trading fund.

The Role of Meme Coins in Investment Portfolios

Both speakers acknowledged the potential of meme coins in crypto portfolios. Joe McCann revealed that Asymmetric was among the first institutional funds to invest in meme coins, identifying Bonk as an asymmetric opportunity at a $28 million market cap. He argued that having exposure to meme coins, culture coins, or lab coins is crucial for outperforming traditional crypto assets like Bitcoin or Ethereum.

Arthur Cheong noted the empirical outperformance of meme coins over more fundamentally-driven projects, particularly in the Solana ecosystem. He mentioned the "barbell portfolio" strategy some traders use: going long on SOL and Solana meme coins while avoiding projects in between. While acknowledging this trend, Cheong expressed hope that fundamentals would eventually matter more.

The Impact of the US Election on Crypto Markets

The speakers discussed the potential impact of the upcoming US election on crypto markets. Arthur Cheong suggested that the outcome could result in a 20% difference in crypto market cap within days of the result, with a Republican victory potentially driving the market up by 10% and a Democratic win possibly causing a 10% decline.

Joe McCann, however, downplayed the importance of the election outcome itself, focusing instead on the potential risks of a contested election result. He noted that such uncertainty could actually benefit Bitcoin, as seen during past periods of market chaos. McCann predicted that a Trump victory could quickly push Bitcoin to $100,000, while a Democratic win might see a slower climb to all-time highs.

Facts + Figures

• DeFiance Capital invested in around 12 Solana venture bets, with half of them failing to survive.
• Asymmetric grew from eight figures to nine figures of assets under management through capital appreciation, mostly from trading options and derivatives.
• In 2023, 75% of all revenue for Las Vegas strip casinos came from non-gambling revenue.
• Asymmetric identified Bonk at a $28 million market cap as an asymmetric opportunity.
• The options market is pricing in about 12% volatility for the US election outcome.
• In March 2023, during the regional bank crisis in the United States, Bitcoin went from $19,500 to $31,000 in six weeks.
• Joe McCann predicts Bitcoin could quickly reach $100,000 if Trump wins the US presidency.

Top quotes

1. "We realized that it massively underperformed so all the past three years that's because we half of them didn't make it and even for those who survived it's hard for them to outperform Solana." - Arthur Cheong
2. "The beauty of this is that you know at asymmetric we started eight figures of AUM, we're now at nine figures of AUM through capital appreciation and that has mostly to do with trading options and derivatives" - Joe McCann
3. "You're actually still getting a bout of the venture skill return even when you invest in a token that's launched" - Arthur Cheong
4. "My job as a hedge fund manager is to make my investors money and they actually don't give a shit what I'm trading" - Joe McCann
5. "There's no difference between say buying a meme coin and hoping that it goes up a thousand X versus buying a lottery ticket" - Joe McCann

Questions Answered

What are the main differences between liquid and venture investments in crypto?

The main differences lie in the duration of the investments and the ability to manage risk. Venture investments typically have a 10-year lock-up period, while liquid investments often have a one-year lock-up. Liquid investments allow for more active risk management and rebalancing, while venture investments are longer-term bets on projects' success. In crypto, however, the line between venture and liquid can blur as projects often become liquid faster than in traditional markets.

Why did DeFiance Capital shift from a combined liquid and venture strategy to a liquid-only focus?

DeFiance Capital shifted to a liquid-only focus after realizing that their Solana venture bets significantly underperformed over the past three years. Half of their venture investments didn't survive, and even those that did struggled to outperform Solana itself. They found that liquid investments allowed for better risk management and potentially higher returns, especially for allocations under $100 million.

How does fund size affect the choice between liquid and venture investments in crypto?

Fund size plays a crucial role in determining the optimal investment strategy. For allocations less than $100 million, liquid investments almost always provide better risk-adjusted returns. However, for larger allocations exceeding $100 million, venture investments start to make sense for capturing long-term growth. Larger funds can also benefit from strategies involving options and derivatives, which can handle much larger fund sizes effectively in liquid markets.

What role do meme coins play in crypto investment portfolios?

Meme coins have shown potential for asymmetric returns in crypto portfolios. Some investors see them as necessary for outperforming traditional crypto assets like Bitcoin or Ethereum. While they carry high risk, their potential for exponential growth makes them attractive to some investors. However, their place in venture portfolios is questionable, as most meme coins are short-lived and require a strong pulse on culture to identify potential winners.

How might the upcoming US election impact the crypto market?

The US election could have a significant impact on the crypto market. Some predict a potential 20% difference in crypto market cap within days of the result, with a Republican victory potentially driving the market up and a Democratic win possibly causing a decline. However, the bigger concern might be a contested election result, which could trigger market uncertainty. Interestingly, such uncertainty might actually benefit Bitcoin, as it has historically performed well during periods of market chaos.